Harmonizing Anti-Money Laundering Rules
July 31, 08The publication earlier this month by the OECD’s Financial Action Task Force (FATF) of its risk-based-approach document titled “Guidance for Dealers in Precious Metals and Stones” has gone largely unnoticed in the diamond industry. This is rather strange considering that organizations such as the Diamond High Council, Jewelers Vigilance Committee, World Federation of Diamond Bourses, CIJBO and others all claim to have had input in the consultation process leading up to the publication of this remarkable text.
The purpose of the FATF document is not just to guide governments in setting industry-specific rules but very much to assist diamond dealers in the day-to-day implementation of their anti-money laundering obligations. The 36-page guide deserves to be read. [Click here for complete text]
The consultation process had visible consequences. For example, the Kimberley Process, “which is designed to ameliorate risks of conflict finance in rough diamonds,” is identified as a very worthwhile, formally structured program to help dealers assess risk of money laundering and terrorist financing.
If nothing else, the importance the FATF gives to the Kimberley Process in advancing the FATF anti-money laundering and anti-terrorist financing objectives will assure that the Kimberley Process will last forever. It has now ascribed “purposes” beyond the initial concept. But this is just a minor observation.
The FATF is, in a way, relaxing the cumbersomeness of the regulations by allowing a so-called risk-based approach in the diamantaires’ measures to prevent or mitigate money laundering and terrorist financing. Instead of employing a “tick-box approach,” in which a dealer ticks off all kinds of conditions on a long list of risk factors, the FATF’s new Guide offers an approach that allows the allocation of resources in accordance with priorities set by the diamantaires so that the greatest risks receive the highest attention and the lowest risks can be virtually ignored. Each diamantaire makes his own risk priorities. It eases the due diligence burdens, though the document doesn’t “overrule” national laws. It can, however, influence policymakers and legislators – and it should.
I personally feel very good about the document. It may be recalled that on a rainy day in Brussels in December 2003, the Belgian government published diamond industry-specific anti-money laundering and anti-terrorist financing regulations. By doing so, Belgium implemented the FATF Forty Recommendations. These recommendations identified the precious stones and metals dealers as a business particularly vulnerable to money laundering and terrorist financing and, as such, needed to be put under the umbrella of the same laws that had already been imposed on the worldwide banking systems.
The Belgium government went “overboard” and, in a way, made the entire diamond industry “over-compliant,” if there is such a thing, with measures that were quite out of sync with responsible industry business practices. At that time, I wrote that it was incomprehensible that a diamond transaction considered illegal in Belgium would be perfectly all right a few miles north of Antwerp over the border in Holland.
With the active support of the ABN AMRO bank’s international diamond and jewelry division, we then (in 2004) published a 184-page book entitled Diamond Industry Strategies to Combat Money Laundering and the Financing of Terrorism (which was subsequently updated and published in Hebrew). The book argued three basic points:
• Tangible benefits will be derived from involving the industry in a consultative process with the governments (and not just with the financial authorities responsible for the financial intelligence units) in planning a “fully integrated action plan,” which will cover the entire pipeline and not just selective parts.
• The industry can provide important input in the development of technical mechanisms, data aggregation systems, reporting requirement parameters etc. Traditionally, this has been a closed and secretive business. It is now changing and becoming transparent. This openness is also expressed in its willingness to share and assist governments in humanitarian and security issues of the highest order.
• A more efficient and reliable implementation of the anti-money laundering and combating the financing of terrorism (AML/CFT) objectives will be achieved through an agreed system of industry self-regulation rather than through the imposition of mandatory (and not necessarily effective) measures. This industry has a proven record of being able to galvanize forces and work in unison. The primary objectives of the legislators – the taking of preventive measures – may well be better met by the industry itself.
It is now four years later, and the industry has become deeply involved – which is desirable. Moreover, in countries like India and Israel, the industry is “pressuring” government to expedite the enactment of industry-specific AML/CFT legislation. We also see a high degree of self-regulation.
The FATF, in its peer review missions, has been monitoring the industry’s performance – in a similar way that the Kimberley Process missions operate. The FATF inspected the Israeli industry a few months ago; they’ll be in South Africa in early August.
The U.S. is Disappointing
In South Africa, Israel, Belgium, Botswana and some other countries, the diamond business is subject to regulatory or professional requirements which complement AML/CFT measures, e.g. dealers are licensed and some of their activities are overseen by government agencies. The FATF document suggests that, “where possible, it will be beneficial for dealers to devise their AML/CFT policies and procedures in a way that harmonizes with other regulatory or professional requirements.
A risk-based AML/CFT regime should help ensure that honest customers and counterparties can access the services provided by dealers, but creates barriers to those who seek to misuse these services.”
In the United States, diamond dealers, exporters, importers, jewelers, etc. are not licensed in any way similar to the diamond sectors in the cutting centers. One cannot, with the push of a button on a government computer, get a list of everyone that is entitled to deal in diamonds. Likewise, the absence of specific professional or industry licensing by the U.S. government makes it implicit that anyone can deal in diamonds and jewelry without prior, specific government approval. That makes the enforcement of industry-specific AML/CFT regulations considerably more difficult in America. After all, how can government audit compliance to a program if it doesn’t know all the members of a group that need to be compliant?
The newly published FATF Guide specifically defines the group that falls within the framework of the AML/CFT regulations as the entire pipeline from the mine to the retailer. The document very specifically includes retailers.
In the U.S., the consultation with industry – which we consider very positive – has led the U.S. Treasury’s FinCEN to include a retailer exemption. Some 30,000 U.S. jewelry stores plus a comparable number of mass merchandisers and large chain stores have been exempted from having AML/CFT programs altogether, unless they source from overseas. We are not aware of a comparable retail exemption in any other country where diamond and jewelry industry-specific rules have been issued.
The publication of the new Guide and the FATF call for a harmonization of AML/CFT systems should give rise to a review of some of the frameworks that have already been promulgated as well as a guide for those governments where the rules are still in the process of being finalized.
We know that in the aftermath of the St. Petersburg conclave, producers are currently exploring possibilities to arrive at internationally agreed upon Best Practice Principles, ethics, etc. Maybe the FATF Recommendations, as they affect diamonds and jewelry, should become part of the worldwide diamond and jewelry business’s Best Practice Principles.
It would be a way to achieve AML/CFT harmonization through self-regulation. It would also fill the void in those instances, like in the United States, where the applicable rules are clearly below the FATF standards. At the same time, this would reduce those trade barriers or discriminations that some national rules (such as in the U.S.) have created.
Have a nice weekend.